That we're seeing slow wage growth these days is true and that's not something we're happy about--we'd like everyone to be enjoying constantly, consistently and strongly rising incomes. It's also something of a puzzle. The idea that full employment increases the workers' wages is one so simple that even Karl Marx managed to get it right. But we're at what we pretty much do think is full employment and we're not seeing those wages rising strongly. Hmm, bit of a problem that. It could be that the basic theory is wrong but that's most unlikely. It's a simple enough one and no one can really see any errors in it.

Could be, of course, just that the bosses are stealing it all but that doesn't really work either. Because the very basis of the theory is that full employment destroys the ability of the bosses, or the capitalists, to run off with all the money. But something's causing it and according to the Federal Reserve Bank of San Francisco it's the baby boomers. Which seems fair actually, because we get to blame them for everything else from tie die t-shirts through to the Ford Pinto and the state of the children today--all things thoroughly deserving of blame, obviously.

It's more subtle than just that older people tend to earn more--annual wage rises and all that:

“While higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs,” paper authors Mary C. Daly, Bart Hobijn, and Benjamin Pyle wrote. “Together these two changes have held down measures of wage growth.”

Wages for those who have been out of work for some time generally are lower than those of people permanently employed. So, as the baby boomers age out of the workforce to be replaced by those displaced then average wages fall. Not necessarily actually fall, fall, you understand, but fall from where they would have been otherwise:

Daly said the overall exchange of new workers for new retirees is holding earnings down by a little under 2 percentage points.

The phenomenon of richly paid retirees being replaced by more poorly paid workers is always occurring, Daly added, but the impact of the baby boomer generation, because of its size, is about double the historical average.

That last does obviously need to be said, the workforce is ageing out of actually working all the time, what matters here is that bulge of the boomers heading off to the diaper clad wonders of their golden years.

Simply stated, new entrants to full-time work, whether they are entering for the first time, re-entering from periods of involuntary or voluntary non-employment, or moving from part-time to full-time work, are more likely to make below-average wages. Counterintuitively, this means that strong job growth can pull average wages in the economy down and slow the pace of wage growth.

As the boomers are filtering out at the top, this is who is coming in to replace them.

I like this finding a lot for two entirely unrelated reasons. The first is that it does explain that puzzle of why wage growth isn't as strong as we think it should be given unemployment levels--yep, like everything else, it's the boomers' fault. The second is that it highlights something very important about Econ 101. Sure, it's only a sketchy guide to the basic theories, much of the world does indeed contradict the very simple explanations. But pretty much all of economics after 101 is about trying to explain why the world doesn't work like those very simple models. We cannot say that because we've found something which contradicts Econ 101 that those simple models are wrong that is, for we generally find when we do investigate that we've a special circumstance of those models, not a refutation of them.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. ...